Protecting your finances if housing prices drop
When Issac Newton said, “What goes up, must come down,” he was talking about gravity, not the housing market. But he might as well have been. Housing values go up, but can very easily go down in the event of a housing market correction, which could be dangerous for over-stretched homeowners carrying big mortgages.
A new report released by the Canadian Mortgage and Housing Corporation (CMHC) indicates that housing markets in several areas across the country are showing trouble signs in four key areas:
- Rapid increase of prices
- Too many new homes being built, too quickly
- Overheated home sales
- High prices and low affordability
So what does this mean to the average homeowner, or prospective first-timer? Resist the temptation of low interest rates that are dangling in front of you.
“Buying a home can be a great investment, but it has to be part of an overall responsible financial management strategy,” says Jeff Schwartz, executive director at the Consolidated Credit Counseling Services of Canada.
“In order for your housing investment to grow over time, the market conditions have to be favourable; this latest report shows that there are a number of conditions in a number of areas that could weaken the market. This could create a debt disaster if you’ve taken on a hefty mortgage. Proceeding with caution into the housing market is the best course of action.”
Dispel the pre-approval myth
Just because the bank pre-approves you for a certain amount, does not mean that you should take it on. Always leave plenty of wiggle room in your budget. Make sure to be able to comfortably afford all of your household expenses and have enough left over for emergency savings as well.
Expect a flip flop
While housing prices are high (in some areas) and interest rates are low, expect the situation to reverse. What would happen to your household finances if prices dropped and rates went up (test your family budget)?
The amount you have to pay every month could increase, and the amount that you actually own (the value of your house) could decrease. Talk about feeling the squeeze!
Own more than you owe
The less debt you have against your home, the less vulnerable you are in the event of a housing market correction. Take proactive steps to work towards owning more of your home, then owing a balance on it.
Put off the house purchase until you have a sizeable down payment. Not only will this reduce the amount of mortgage you need to take out, if you can rack up more than 20 percent, you can avoid paying mortgage insurance premiums, which add a substantial cost to your loan.
Take advantage of mortgage options offered by your lender to pay that mortgage down aggressively. Most lenders offer things like “match a payment” (allowing you to double your regular payment without penalty) or lump sum payments (usually allowed once a year- and often go directly toward the principal amount, reducing the amount you owe).
Are you thinking about home ownership or are concerned that you’ve taken on too much mortgage? Budgeting around these costs is crucial to your success. Call one of our trained credit counsellors or check out our free online debt analysis tool to get started!